📄 This document is an English translation of the official 2023 Program Implementation Review on the Policy Implications of the Government’s Preference for Interest Subsidies over Direct Loans, issued by the Special Committee on Budget and Accounts. The translated content is faithful to the original Korean manuscript and structured for readability. The analysis in this section was authored by Junghwan Kim (na32@assembly.go.kr).

1. Introduction

1.A. Overview of Public Financing Programs

Public financing programs are government-backed financial initiatives aimed at achieving specific policy objectives. These include liquidity provision and industrial promotion through mechanisms such as loans, interest subsidies, guarantees, and equity investments.

The Korea Institute of Finance (2013) defines public financing as finance with public-purpose characteristics that compensate for market failure by improving access, availability, and affordability of capital.

The National Assembly Budget Office (2022) describes public financing as funding and services provided by public financial institutions governed by the Act on the Management of Public Institutions, classified into SME, export, development, housing, and inclusive finance.

Public financing support is classified by funding type:

1. Loan Support
   • Direct loans: Managed and disbursed by the government or public agencies, which bear credit risk.
   • Indirect loans: Executed by financial institutions; the government recoups principal and interest as per agreement.
2. Interest Subsidy Support
   • Covers the interest rate gap between market loans and policy financing.
3. Guarantee Support
   • Credit guarantees via institutions like KODIT, KIBO, or regional foundations; guarantees are activated upon default.
4. Equity Investment Support
   • Government equity through funds or SPVs to finance private-sector initiatives.

1.B. FY2023 Public Financing Budget Execution by Ministry

The total executed budget in FY2023 across 22 ministries was KRW 43.2 trillion out of KRW 44.9 trillion (execution rate: 96.3%). The top three ministries—MOLIT (54.0%), MSS (19.1%), and MAFRA (8.6%)—accounted for 81.7% of the total.

FY2023 Budget Execution by Ministry (Unit: million KRW)

1.C. Expenditure Trends by Support Type (2019–2023)

Among all support types, interest subsidies posted the highest average annual growth rate at 20.1%, reaching KRW 1.73 trillion in 2023. Equity investments also showed significant expansion.

Support Type Trends (Unit: million KRW, %)

Note: Loan support includes categories 450-04 (other private loans) and 450-02 (financial institutions). Interest subsidies reflect 320-05. Guarantee and investment figures are based on project-specific aggregates. Source: Digital Budget and Accounting System.

2. Implementation Review and Implications

The following analysis of public financing programs is organized by four primary types of fiscal support: (1) loan and interest subsidy programs, (2) credit guarantee programs, and (3) equity investment (fund-based) programs. This section—authored by Junghwan Kim—focuses specifically on the loan and interest subsidy programs, evaluating their fiscal execution, administrative frameworks, and implications for fiscal soundness and transparency.

2.A. On Loan and Interest Subsidy Program Structures

According to the 2023 Budget Compilation and Fund Management Guidelines, which outline four major fiscal reform strategies, ministries are instructed to consider converting direct government loans into interest subsidy programs. The guideline emphasizes reducing total expenditure while preserving accessibility for beneficiaries, thereby ensuring policy objectives are not undermined. It explicitly calls for interest subsidy programs to be used where possible, especially when the target recipients (e.g., creditworthy firms) can access private finance.

“Convert direct lending programs into interest subsidy-based ones, reducing expenditure while expanding the number of beneficiaries. For example, firms with good credit and collateral should be transitioned to interest subsidy support.”

From the expenditure restructuring perspective, direct loans require full allocation of the principal amount as fiscal expenditure during the disbursement year. In contrast, interest subsidies cover only the interest gap, substantially lowering the immediate fiscal burden.

From the beneficiary accessibility perspective, direct loans are better suited for recipients with limited collateral or credit, enabling support for vulnerable groups excluded from conventional financial markets. However, interest subsidy schemes do not cover principal defaults, thereby limiting financial institutions’ incentives to lend to startups, low-credit SMEs, or marginalized populations. As a result, financial inclusivity may weaken.

Moreover, under high interest rate conditions, the gap between market and policy loan rates widens, leading to an increased fiscal burden for the government. Since interest subsidies only cover a portion of the interest, the resulting effective loan rate may remain unaffordable for many, deterring participation.

Despite these nuances, some programs have been redesigned solely from a budget-cutting perspective, without due consideration of each scheme’s policy role and structural suitability—resulting in poor performance or misaligned execution.

Case for Low Execution Rate Relative to Budget Plan

Some programs converted from direct lending to interest subsidies in 2022 (via the 2nd supplementary budget) were poorly planned, lacked clear institutional cooperation, and suffered from weak demand—ultimately resulting in under-execution or total budget lapse in 2023. This highlights the need for more rigorous pre-assessment of financial institution willingness and applicant demand.

For example, the Ministry of Trade, Industry and Energy (MOTIE) established interest subsidy items in its Energy and Resources Special Account and Electricity Industry Fund through budget amendments in 2022. These were continued into the 2023 budget.

However, according to the National Assembly’s budget report, the 2022 supplementary budget allocated ₩1.56 billion for the interest subsidy component of the Renewable Energy Finance Support program, replacing ₩88.4 billion in loan funding—but none of this was executed by October 2022. The same was true for the Green Innovation Finance program, where ₩0.94 billion in subsidy funds were not executed, raising serious concerns about the feasibility of 2023 allocations.

2023 Interest Subsidy Programs under MOTIE Unit: million KRW

Source: Ministry of Trade, Industry and Energy (MOTIE)

The Ministry cited high market interest rates and financial institutions’ preference for risk-free direct loan programs as primary reasons for poor performance.

Cases of Interest Subsidy Execution Beyond Approved Budget

Some programs under the Ministry of Agriculture, Food and Rural Affairs and the Korea Forest Service executed more than their approved budget, resulting in unpaid obligations and potential violations of parliamentary budget authority.

Example 1: Agricultural Loan Interest Subsidy Program

To begin with, the “Interest Subsidy for Agricultural Loans” program, administered by the Ministry of Agriculture, Food and Rural Affairs, provides interest support to financial institutions by covering the interest rate differential on low-interest loans extended to farmers. In the 2023 main budget, a total of KRW 451.942 billion was allocated to this program.

Of this amount, KRW 481 million was reallocated to cover disaster recovery costs, leaving KRW 451.461 billion available for disbursement. However, the Ministry was able to transfer only KRW 416.693 billion to the implementing agency (NongHyup Bank), due to a shortfall in revenue within the Special Account for Agricultural and Rural Structure Improvement.

2023 Agricultural Loan Interest Subsidy Program Execution Unit: million KRW

Source: Ministry of Agriculture, Food and Rural Affairs (MAFRA)

However, according to documents submitted by the Ministry of Agriculture, Food and Rural Affairs, the interest subsidy requirement under the 2023 business agreement with NongHyup Bank for the Interest Subsidy for Agricultural Loans program was KRW 578.739 billion. This amount exceeds the actual 2023 disbursement of KRW 416.693 billion by KRW 162.046 billion.

This indicates that the project was implemented in excess of the budget approved by the National Assembly under the Special Account for Agricultural and Rural Structure Improvement, with the excess interest subsidy covered by NongHyup Bank, the implementing institution. Such over-execution violates the principle of parliamentary budget authority and constitutes an improper use of public funds.

As a result of this over-execution, a carryover obligation of KRW 162.046 billion remains outstanding and must be paid in 2024. This amount accounts for 32.2 percent of the effective 2024 main budget (KRW 502.582 billion), excluding KRW 55.14 billion that was specifically allocated to resolve unpaid obligations from 2022.

Since interest subsidy payments are typically executed under binding agreements with financial institutions, designed to compensate the gap between market interest rates and policy target rates throughout the loan period, this type of expenditure is quasi-obligatory in nature. Therefore, carrying out interest subsidy payments beyond the budget authorized by the National Assembly risks undermining fiscal discipline and may lead to escalating public expenditure risks.

Example 2: Forest Management Composite Fund Interest Subsidy

The “Interest Subsidy for Forestry Project Loans” program under the Korea Forest Service includes a sub-program titled “Interest Subsidy for Existing and New Loans.” This initiative provides policy loans at low interest rates to forestry operators and producer organizations for purposes such as short-term forest income support. It aims to promote private forest management and increase forestry income, while compensating financial institutions for the interest losses incurred from offering below-market lending rates.

For this program, a total of KRW 9.487 billion was allocated as interest subsidy support in 2023. This included KRW 7.399 billion for existing loans, KRW 247 million for new loans issued in 2023, and KRW 1.841 billion for converting existing loan projects into interest-subsidized financing.

2023 Forest Fund Interest Subsidy Shortfall Unit: million KRW

Source: Korea Forest Service

However, according to data submitted by the Korea Forest Service, the total amount of interest subsidy that was required to be paid to financial institutions in 2023 amounted to KRW 11.014 billion, which exceeds the budgeted amount by KRW 1.527 billion.

As with the case of the Ministry of Agriculture, Food and Rural Affairs, this indicates that the subsidy was expanded beyond the budget level approved by the National Assembly, constituting an improper execution of the budget.

If such practices become routine, they may pose a serious risk to fiscal discipline, potentially leading to escalating off-budget obligations and undermining the credibility of the national budgetary process.

Need for Oversight by Type of Interest Subsidy Support

Government interest subsidy programs can be categorized by the specific support mechanism used.

From the perspective of financial institutions, the support takes one of two forms:

1. Actual-cost reimbursement, where the government compensates the exact interest subsidy amount paid by the financial institution; or
2. Estimated lump-sum payments, calculated by applying a predetermined interest subsidy rate to the average loan balance, based on a pre-signed agreement.

From the perspective of the loan recipients, support can also be divided into two models:

1. Floating subsidy model, where a fixed target interest rate is maintained for the borrower and the interest subsidy rate varies by loan case; and
2. Fixed subsidy model, where the interest subsidy rate is fixed, and the final loan interest rate applied to borrowers varies by case.

Matrix of Interest Subsidy Program Structures By Subsidy Type and Disbursement Method

First, in reimbursement-based interest subsidy programs that fix a target interest rate and reimburse the actual difference between the average lending rate of each financial institution and the target, both banks and borrowers have weakened incentives to reduce lending rates. Therefore, a stronger oversight framework is needed.

The Financial Services Commission’s (FSC) Interest Subsidy Support program aims to reduce financing burdens for small business owners affected by COVID-19 by covering the gap in loan interest rates. In 2023, KRW 56.82 billion was executed out of the planned KRW 63.02 billion (execution rate: 90.2%), leaving KRW 6.2 billion unused.

This program consists of two subprograms:

• Interest Subsidy for Low-Income Small Business Owners (KRW 27.03 billion)
• Hope Plus Interest Subsidy (KRW 35.99 billion)

Each of them executed KRW 21.88 billion and KRW 35.01 billion, respectively, during the year.

In the case of the Interest Subsidy for Low-Income Small Business Owners, the target interest rate is fixed at 2.5 percent, and the interest subsidy amount is calculated as the difference between the actual loan interest rate and the target rate, on a loan-by-loan basis.

2023 Subsidy Disbursements by Bank under the Low-Income Small Business Interest Subsidy Program

Source: Financial Services Commission

Support schemes like the Interest Subsidy for Low-Income Small Business Owners, in which the interest subsidy is linked to a fixed target rate (2.5%) on a per-loan basis, may give rise to moral hazard when compared to models that apply a uniform, pre-fixed subsidy rate across all loans. This is because;

1. From the recipient’s perspective, since the final loan interest rate is fixed at 2.5% regardless of the pre-subsidy rate, there is no incentive to negotiate or provide documentation to lower the loan rate prior to receiving the subsidy.

2. From the financial institution’s perspective, since the post-subsidy interest rate is fixed at 2.5%, there is limited motivation to compete with other banks by offering lower rates. In fact, the higher the loan rate before subsidy, the greater the government subsidy, which could encourage lenders to inflate pre-subsidy rates to maximize the financial benefit.

These dynamics reduce market discipline and could lead to inefficient allocation of fiscal resources unless properly monitored and capped.

Interest Rate Gap & Government Reimbursement per Bank (2023)

Note: Banks with average rates exceeding 5.61% are highlighted.
Source: Financial Services Commission

From this breakdown, we observe that SC Bank and Gyeongnam Bank had relatively modest average rates (3.80%, 4.31%), while Gwangju Bank (7.07%), KB Bank (6.23%), and Jeju Bank (6.10%) exceeded 6%.

Therefore, if the interest subsidy program is administered by reimbursing the gap between actual and target rates on a per-loan basis, more rigorous oversight is necessary. The government should particularly scrutinize banks with higher-than-average rates to verify the legitimacy of their subsidy claims and prevent moral hazard.

Second, in programs that provide interest subsidies in a lump-sum (estimated advance) format, discrepancies may inevitably arise between the assumed interest rate used to calculate the subsidy and the actual interest rates applied in practice. Therefore, a reconciliation mechanism must be established.

The “Hope Plus Interest Subsidy” program under the Financial Services Commission’s (FSC) Interest Subsidy Support project was allocated KRW 35.099 billion in 2023. This was calculated based on the assumption of an average lending rate of 6.3% and a target rate of 3.3%, with the government covering 70% of the 3.0%p gap, resulting in a subsidy rate of 2.1%. This 2.1% rate was then multiplied by the estimated average loan balance to derive the total subsidy requirement.

Notably, reflecting the interest rate environment, the FSC increased the assumed average lending rate used for budgeting from 4.5% in 2022 to 6.3% in 2023.

Overview of the Hope Plus Interest Subsidy Program

Source: Financial Services Commission

Based on this structure, the Korea Credit Guarantee Fund (KODIT) disbursed lump-sum interest subsidies to 14 commercial banks. The amount was determined by multiplying each bank’s average outstanding loan balance by the pre-agreed 2.1% subsidy rate.

Interest Subsidy Disbursements by Bank under the Hope Plus Program (2023)

Source: Financial Services Commission

However, despite this lump-sum structure, no post-execution reconciliation has been conducted as of July 2024 to verify whether the assumed 6.3% lending rate used in budget calculations reflected actual conditions. KODIT had not compiled actual 2023 average interest rate performance for the 14 banks involved.

Given that the actual 2023 average lending rate under the Low-Income Interest Subsidy Program was only 5.61%, it is highly plausible that the Hope Plus Program, targeting high-credit borrowers, also fell below the assumed 6.3%.

Therefore, the FSC and KODIT must carry out proper settlement and reconciliation for the lump-sum subsidies disbursed in 2023 and publicly disclose the true fiscal cost of executing the program. Transparent accounting is essential for ensuring fiscal responsibility and maintaining trust in subsidy-based financial support systems.

2.B. On Need for Strengthening the Management and Operational Framework for Loan and Interest Subsidy Programs

Loan and interest subsidy support programs are typically administered by public agencies under each ministry, which handle borrower and financial institution management tasks.

To support these operations, ministries follow two main approaches:

• Indirect Cost Inclusion: Integrate management expenses within existing personnel or operational support budgets of affiliated public institutions.
  • Examples: Ministry of Economy and Finance (Korea Eximbank), Ministry of SMEs and Startups (Small Enterprise and Market Service), Ministry of Personnel Management (Government Employees Pension Service).
• Direct Budget Allocation: Allocate separate operational funds to cover project management costs of affiliated institutions.
  • Examples: Ministry of Land, Infrastructure and Transport (Housing and Urban Guarantee Corporation), Ministry of Unification (Korea Eximbank), Ministry of SMEs and Startups (Korea SMEs and Startups Agency).

Examples of Dedicated Budget Allocations for Public Agency Loan/Subsidy Management (Unit: ₩ million)

Source: Reorganized from materials submitted by each ministry

However, several irregularities were found in the financial administration of certain loan and interest subsidy programs. Specifically:

• In some cases, a portion of loan principal and interest repayments were allowed to be used directly by public agencies as service fees, without appropriate accounting.
• In others, interest subsidy funds—intended to offset borrower costs—were partially reallocated by public agencies as management costs, without explicit cost-verification requirements.

Such practices lack transparency and accountability and should be rectified through stricter financial oversight and adherence to public expenditure principles.

Establishing a Proper Disbursement Mechanism for Implementing Agency Management Costs

Loan and interest subsidy programs are typically managed by public institutions affiliated with each ministry. Ministries follow two main approaches:

• Inclusion in General Operating Budgets: Some ministries incorporate management costs within the operating budgets of the public institutions (e.g., Korea Eximbank under the Ministry of Economy and Finance; Small Enterprise and Market Service under the Ministry of SMEs and Startups).
• Separate Project Budgeting: Other ministries allocate dedicated budget lines to cover management fees for administering loan/subsidy programs (e.g., Housing and Urban Guarantee Corporation under MOLIT; Korea Eximbank under MOU).

However, in some loan support programs, public institutions are allowed to directly retain a portion of loan principal and interest repayments as handling fees. This practice—an exception to the principle of gross budgeting—is executed based on ministry-specific internal guidelines rather than consistent national standards, raising concerns about fiscal discipline.

2023 Cases Where Public Agencies Used Loan Repayments Directly as Management Costs (Unit: ₩ million)

Source: Compiled from ministry submissions

Examples include:

• Korea Environmental Industry & Technology Institute retained ₩597 million (0.1%) as a handling fee.
• Korea Industrial Complex Corp. retained ₩90 million under the same structure.
• Korea Energy Agency, in particular, directly managed loans without intermediaries and retained 1.0% of loan balances as fees, amounting to ₩1.66 billion in 2023.

Such practices indicate the need to reclassify and formally budget for management costs instead of allowing agencies to divert portions of repayments. Ministries such as MOE and MOTIE are advised to avoid informal deductions and consider allocating separate line items for public agency costs.

Curbing the Use of Interest Subsidies for Administrative Expenses

Some ministries currently use interest subsidy funds to cover the operating costs of implementing agencies. However, interest subsidies are not subject to detailed post-expenditure reconciliation, unlike other subsidy programs or contractual services. Thus, allocating administrative costs from these funds lacks transparency and legal basis.

According to the 2023 Budget Execution Guidelines, interest subsidies are intended solely to lower lending rates below market or borrowing cost levels. There is no legal justification for using these funds to cover project management costs.

2023 Cases Where Interest Subsidy Funds Were Used for Project Management(Unit: ₩ million)

Source: Compiled from ministry data

Key findings include:

• The Korea Institute for Advancement of Technology, managing MOTIE’s EV support program, was permitted to retain ₩88 million from the ₩2.49 billion interest subsidy fund as planning and evaluation costs.
• The Korea Environmental Industry & Technology Institute, under MOE, deducted 0.1% of loan balances to cover handling costs, effectively reducing the intended benefit of the interest subsidy.

Since interest subsidies are designed solely to reduce loan costs, using them as administrative funding undermines their purpose. Moreover, such deductions reduce the actual interest support effect for borrowers and lack proper oversight.

Ministries such as MOTIE and MOE should discontinue the practice of covering management costs from interest subsidy funds. Instead, administrative costs should be transparently and independently budgeted through separate appropriations.

Need to Establish Oversight for the Direct Use of Project Revenue

The Ministry of Science and ICT’s (MSIT) “ICT Convergence Technology Development Loan Support” project has revealed an oversight issue: the Institute for Information & Communications Technology Planning & Evaluation (IITP), the designated agency, subcontracted fund management tasks to IBK (Industrial Bank of Korea) without statutory basis. Furthermore, IBK has been authorized to directly deduct its administrative commission from loan principal and interest repayments, a practice that lacks legal clarity and warrants correction.

This loan support program was designed to enhance the competitiveness of small and medium ICT enterprises and foster emerging industries. In 2023, a total of KRW 12.455 billion from the Information and Communications Promotion Fund was disbursed to IITP exclusively for lending purposes.

Back in 2004, IITP (then the Information and Communications Research Promotion Agency) signed an agreement titled:

“Agreement on Delegated Management of the Information Promotion Fund (Technology Development Loan Project)”

• Article 11:
  ① The “Party A” (IITP) shall pay the “Party B” (IBK) an annual administrative fee equal to 0.05% of the outstanding loan balance.
  ② The “Party B” shall deduct this fee directly from loan repayments and deposit the remainder into the Fund’s account.

Responding to complaints that the 0.05% rate was insufficient, IITP unilaterally increased the fee to 0.10% at the end of 2023, without revising the original contract, and continued the higher fee into FY2024.

Breakdown of Loan Disbursement and Fee Deductions (FY2023)

1. MSIT
   └── Disburses KRW 12.45 billion to IITP (loan capital)

2. IITP
   └── Subcontracts fund management to IBK

3. IBK
   ├── Disburses loans via commercial banks
   └── Deducts 0.10% administrative fee from repayments

4. Commercial Banks
   ├── Provide loans to SMEs
   ├── Deduct 0.6% loan handling fee
   └── Deduct 0.9% guarantee fee for Korea Technology Finance Corporation

5. SMEs
   └── Repay loans with total 1.6% deduction before repayment reaches the fund

To be specific, first, each commercial bank, on a quarterly basis (or monthly in the case of early repayment), remits loan principal and interest received from borrowers to the fund management institution, the Industrial Bank of Korea (IBK), after deducting a loan handling fee (0.6%p interest rate) and a guarantee fee (0.9%p interest rate) for the Korea Technology Finance Corporation.

Then, IBK deducts a 0.1%p administrative outsourcing fee for its fund management services from the remitted amount and transfers the remaining balance to the ICT Promotion Fund.

However, the legal basis for this program, namely the Framework Act on the Promotion of the ICT Industry and its Enforcement Decree, provides that the Ministry of Science and ICT may delegate part of the fund operation and management tasks to the Korea Communications Agency or institutions and organizations related to the ICT industry, but does not explicitly allow for the re-outsourcing of fund management tasks to private commercial banks.

Framework Act on the Promotion of the ICT Industry
Article 45 (Operation and Management of the Fund)
③ The Minister of Science and ICT may, as prescribed by Presidential Decree, delegate part of the fund’s operation and management to the Korea Communications Agency under Article 66(1) of the Radio Waves Act or to institutions or organizations related to the ICT industry.
④ Matters necessary for fund operation and management not stipulated in Paragraphs 1 to 3 shall be prescribed by Presidential Decree.

Enforcement Decree of the Framework Act on the Promotion of the ICT Industry
Article 22 (Delegation of Fund Operation and Management Tasks)
① The Minister of Science and ICT shall delegate part of the operation and management of the ICT Promotion Fund, under Article 41 of the Act, to the Korea Communications Agency.
② The Korea Communications Agency shall bear the costs for handling the delegated tasks as funded by the ICT Promotion Fund.
③ The Minister of Science and ICT may operate the fund as a loan through financial institutions as defined by the Banking Act or other relevant laws. In such cases, the loan interest rate and other necessary conditions shall be determined in consultation with the Minister of Economy and Finance.

These provisions do not specify the authority to reassign fund management duties of individual loan programs to commercial banks.

Furthermore, the Institute for Information & Communications Technology Promotion (IITP) is currently paying administrative outsourcing fees to commercial banks such as IBK by allowing them to retain a fixed percentage of loan repayments, rather than through formally appropriated budget expenditures.

In addition, without revising the original outsourcing agreement, IITP unilaterally increased the fee rate from 0.05% to 0.10% as of December 2023, and continued to pay the increased rate through July 2024.

Therefore, the Ministry of Science and ICT is advised to discontinue this practice of allowing commercial banks to directly deduct and retain management fees from loan repayments, especially in the absence of a clear legal basis, and should ensure such payments are made through proper budgetary allocation processes.

Need to Establish a Management Framework for the Direct Use of Loan Revenues

Furthermore, loan handling fee rates are determined by each ministry through internal regulations or agreements with financial institutions, taking into account the level of difficulty and operational conditions of individual loan programs. It is necessary to establish a system that allows for continuous monitoring and adjustment of the appropriateness of these fee levels.

Most loan programs set a fixed percentage of the outstanding loan balance as the loan handling fee rate to compensate financial institutions (including commercial banks) for personnel costs, general operating expenses, and other associated taxes and charges incurred while managing loan support operations. The portion of the principal and interest that remains after subtracting these handling fees is then returned to the national treasury.

While the principle is that proceeds (principal and interest) derived from loan funds supported by national finance should be returned to the treasury, an exception has been made in recognition of the unique characteristics of loan programs and the need to compensate financial institutions for implementation and management costs. Thus, a certain percentage of the revenues may be retained by financial institutions as loan handling fees.

Typically, a handling fee rate of 1.0% is applied. However, it was found that some ministries pay financial institutions handling fees that exceed this standard level.

Loan Handling Fee Rates by Ministry (2023)

Source: Compiled based on submissions from each ministry

For example, the “Self-Reliance Loan Program for Persons with Disabilities,” administered by the Ministry of Economy and Finance, provides low-interest loans to low-income individuals with disabilities to help establish a livelihood foundation and promote financial stability. A loan handling fee rate of 1.5 percent is applied under this program.

Case: Loans for the Self-Reliance of Persons with Disabilities (MOEF)

Source: Ministry of Economy and Finance

In addition, the Ministry of Trade, Industry and Energy applies a loan handling fee rate of approximately 1.5 percent to several programs, including the Urban Gas User Facility Installation project, the Renewable Energy Loan program (covering both capital and operational loans), and the Green Innovation Finance (Loan) Program.

• Case: Ministry of Trade, Industry and Energy (1.5% Fee Programs)*

Source: Ministry of Trade, Industry and Energy

In contrast, programs such as the Ministry of Environment’s “Future Environmental Industry Development Loan” and the Ministry of Employment and Labor’s “Industrial Accident Prevention Facilities” loans—which require intensive loan assessment and monitoring—set the handling fee at 1.0%. Similarly, the Ministry of Oceans and Fisheries’ “Modernization of Old Small Tankers” loan program applies a 1.25% rate. Other fisheries-related loans, including “Fisheries Purchase Support,” “Distribution at Production and Consumption Sites,” and “Fisheries Equipment Support,” are operated with a 1.37% handling fee.

Despite these inter-ministerial variations in fee levels, there is currently no unified standard or guideline governing the setting of loan handling fee rates. Instead, each ministry determines the fee through its own rules or agreements with financial institutions. Therefore, a comprehensive improvement plan is needed.

Need for Introducing Settlement Procedures

In addition, due to the absence of clear settlement guidelines for interest subsidy funds, interest income generated from delayed disbursement of these funds is not being returned to the treasury. The Ministry of Trade, Industry and Energy (MOTIE) should consider institutional improvements by establishing rules for settling unused balances and interest income, and by ensuring the return of such income to the national treasury.

The MOTIE’s “Interest Subsidy Support for Eco-Friendly Vehicle Promotion” project aims to support low-interest loans through interest subsidies to facilitate the structural transition of the automotive parts industry toward future vehicles. For FY2023, a total of KRW 2.49 billion in interest subsidy funds (budget item 320-05) was disbursed in full to the Korea Institute for Advancement of Technology (KIAT), the implementing agency.

Of this amount, excluding KRW 88 million allocated for planning and evaluation management expenses (project administration costs), only KRW 853 million was actually used to support new interest subsidy applications in 2023. The remaining KRW 1.549 billion has not been executed and continues to be held by KIAT without formal rollover approval.

Execution Status of 2023 Interest Subsidy Fund (Item 320-05)

Source: Ministry of Trade, Industry and Energy

Due to the sluggish execution of the interest subsidy funds, there is also a need to settle the interest income that accrued during the delay. However, neither the Ministry of Economy and Finance nor the MOTIE has established guidelines on this issue, and as a result, no settlement has occurred.

According to KIAT, interest income generated from unexecuted interest subsidy funds reached approximately KRW 15.61 million in 2022 and KRW 68.25 million in 2023. However, as of the end of June 2024, none of this amount had been returned to the national treasury.

Interest Income from Eco-Friendly Vehicle Interest Subsidy Project

Source: Ministry of Trade, Industry and Energy

In light of the above, the Ministry of Trade, Industry and Energy should promptly take measures to return the interest income generated from delays in executing the interest subsidy funds held by KIAT. Furthermore, it should consider institutional improvements by introducing settlement procedures for unused balances and interest income, in accordance with standard subsidy management practices.

2.C. Assessment of Fiscal Soundness and Transparency in Loan and Interest Subsidy Programs

Management Efforts Required to Improve Soundness of Loan Support Programs

First, the Ministry of Trade, Industry and Energy’s “Special Loans for Overseas Resource Development” program recorded a default amount of USD 9.124 million in 2023, with cumulative debt forgiveness totaling KRW 764.5 billion as of the end of 2023. Therefore, the Ministry should thoroughly manage program execution and repayment collection and define the debt relief ratio through presidential decree as delegated by the relevant legislation, given its direct impact on fiscal revenue.

The Special Loans for Overseas Resource Development program consists of “domestic and overseas oil field development” and “overseas mineral resource development.” The oil field development component is subdivided into “general loans,” in which the borrower repays principal and interest after development, and “special loans,” which allow partial debt relief upon project failure and collect an additional burden if successful.

Looking at the 2023 settlement, the petroleum development segment incurred a default of USD 9.124 million, involving two companies, both of which had not repaid loans issued prior to 2007 and were written off in 2023.

Under Article 11(3) of the Overseas Resources Development Business Act:

“In the case of loan recipients who are unable to repay due to project failure, the government may exempt all or part of the principal and interest as prescribed by Presidential Decree.”

As of the end of 2023, a total of KRW 3.3282 trillion was disbursed as special loans, with KRW 4.8171 trillion recovered and KRW 764.5 billion forgiven.

However, the key matter of debt relief ratio is not stipulated in the Enforcement Decree but rather in the Ministry’s administrative notice “Loan Guidelines for Overseas Resource Development Projects.” Although the Enforcement Decree provides general conditions, it fails to fulfill the legislative intent of delegation to a Presidential Decree.

Since these relief decisions directly affect national fiscal revenue, the relief ratio should be codified through a Presidential Decree, subject to inter-ministerial consultation and Cabinet approval, to strengthen procedural scrutiny. Furthermore, unlike administrative notices, Presidential Decrees are subject to review by the National Assembly under Article 98-2 of the National Assembly Act.

Although the Special Committee on Budget and Accounts pointed this out in its 2022 Final Settlement Report, the Ministry responded that maintaining the current administrative notice is more appropriate due to investment promotion needs and fiscal constraints and marked the issue as “resolved.”

Preemptive Management Needed to Prevent Financial Strain on the Workers’ Welfare Promotion Fund

As defaults worsen in other loan programs backed by credit guarantees from the Workers’ Welfare Promotion Fund (Welfare Fund), there is growing concern over fiscal burdens. Five programs—job training living expense loans under the Employment Insurance Fund, living expense and wage arrears loans under the Welfare Fund, and similar programs under the Industrial Accident Compensation and Wage Claim Guarantee Funds—receive credit guarantees from the Welfare Fund.

The total credit guarantees issued in 2023 amounted to KRW 3.068 trillion, with the largest guarantees directed toward the Welfare Fund’s living expense program (KRW 1.65 trillion) and the Employment Insurance Fund’s job training program (KRW 789.5 billion).

The total subrogated repayments (compensation for defaults) in 2023 reached KRW 33.04 billion, most of which came from the Welfare Fund’s living expense loans (KRW 16.69 billion) and job training loans (KRW 12.51 billion).

More concerning is the low recovery rate of indemnity claims. The recovery rate for wage arrears and living expense loans under the Welfare Fund, as well as the Industrial Accident Fund’s similar program, have remained below 50% between 2020 and 2023. For example, the living expense loan recovery rate was just 8.76% in 2023.

Therefore, the Ministry of Employment and Labor should strengthen program oversight to prevent increasing financial strain on the Welfare Fund and improve the recovery of indemnity claims.

Inadequate Oversight of Public Institutions’ Loan Projects

First, the Ministry of Trade, Industry and Energy (MOTIE) provides loan support for tunnel excavation costs related to non-coal minerals (e.g., limestone) through the Gaeongdo Excavation Project Fund, which is an internal fund managed by the Korea Mine Rehabilitation and Mineral Resources Corporation (KOMIR). However, project planning and performance management are overseen solely within MOTIE, and the fund is not reflected in national financial statements as an asset.

KOMIR, a public institution under MOTIE, manages the Gaeongdo Excavation Fund on behalf of the government based on its internal regulation, the Regulation on Loans and Management of the Gaeongdo Excavation Project. This fund was established through the Korea–U.S. intergovernmental agreement titled “Agreement on the Production and Management of Metallic and Non-metallic Minerals,” signed in 1960.

The fund began operation with a grant of USD 858,000 from the U.S. under the bilateral project agreement (Agreement No. 490-0062) signed on June 29, 1960. The fund aimed to support tunnel excavation in post-Korean War mining redevelopment. While the agreement specified the contribution and its amount, it did not stipulate fund operation and management methods.

Subsequently, the project was transferred in 1962 to the Geological Survey of Korea under the Ministry of Commerce and Industry. In 1967, the revised Korea–U.S. project agreement (Agreement No. 629.2-7013) enabled the Korea Resources Corporation (KR) to manage the fund.

According to the Regulation on Loans and Management of the Gaeongdo Excavation Project, KOMIR prepares an annual fund operation plan subject to review and approval by MOTIE for loan support targeting tunnel excavation of legally designated minerals (excluding oil and coal):

Article 40 (Fund Operation Plan)
(1) The President shall prepare a fund operation plan each fiscal year, obtain approval from the Committee, and submit it to the Minister of Trade, Industry and Energy.
(2) Major changes to the plan shall also be subject to Committee deliberation and Ministerial approval.
(3) The scope of “major changes” shall be determined by the Committee.

Although the account owner is KOMIR, it submits a report on fund operations to the Minister each fiscal year:

Article 42 (Operation Report)
(1) KOMIR must prepare a report on fund operations within three months after the fiscal year ends, obtain Committee approval, and submit it to the Minister.
(2) The report shall include a budget performance statement, balance sheet, and income statement.

According to the 2023 Operation and Settlement Report of the Gaeongdo Excavation Fund, loans totaling KRW 5.812 billion were provided to 26 mines. As of year-end 2023, the outstanding loan balance was KRW 14.873 billion, with KRW 2.118 billion in unutilized cash reserves held within the fund.

Financial Status of the Gaeongdo Excavation Fund (1969–2023)

Source: MOTIE

Despite this, MOTIE does not disclose the fund as a national asset under the National Accounting Act, which defines “funds” as those established under Article 5(1) of the National Finance Act. As the Gaeongdo Fund is not listed under that provision, MOTIE excludes it from public disclosure. KOMIR also excludes the fund from its corporate accounting reports on the same basis.

Accordingly, both MOTIE and KOMIR should begin efforts to clarify the legal character of the Gaeongdo Excavation Fund and ensure the related loan operations and fund management are reported to the National Assembly.

Inadequate Oversight of Public Institutions’ Loan Projects (Continued)

Second, the Korea Mine Rehabilitation and Mineral Resources Corporation (KOMIR) has carried out the Substititution Industry Loan Projects using contributions for deficit compensation through 2023. However, since KOMIR was de-designated as a deficit-compensation institution starting in 2024, it is now expected to operate the loan fund using its own surplus resources. Accordingly, it is necessary to ensure a level of transparency equivalent to that of budgetary revenue and expenditure.

The Substitution Industry Loan Project provides facility and operating loans to businesses that are newly established, expanding, relocating, or operating in designated mining redevelopment zones or agro-industrial complexes.

Until 2023, the Ministry of Trade, Industry and Energy (MOTIE) provided new loan funds to KOMIR for the execution of the Substitution Industry Loan Project as part of its contributions to the agency, which had been designated for deficit compensation.

As of 2023, KOMIR executed KRW 12.743 billion in contributions, and collected KRW 11.447 billion in principal and KRW 681 million in interest as internal revenue.

Performance of the Substitution Industry Loan Program at KOMIR, 2021–2023

Source: Ministry of Trade, Industry and Energy

According to KOMIR, the outstanding loan balance for the Substitution Industry Loan Program is estimated to be KRW 79.3 billion in principal as of the end of December 2024.

However, although KOMIR was no longer designated as a deficit-compensation institution starting in 2024, MOTIE has not reclaimed the previously issued loan funds. Instead, KOMIR has been allowed to retain and continue using these funds to operate the Substitution Industry Loan Program.

As a result, KOMIR is now able to use both the repaid loan principal and the interest income as internal revenue. Given that these proceeds originate from state-contributed funds for loan implementation, it is essential to establish transparency measures equivalent to those governing national revenues and expenditures. Additionally, MOTIE should enforce strict management and accounting procedures over such funds.

Furthermore, MOTIE must ensure that no future cases arise in which loan funds are disbursed in the form of contributions to affiliated public institutions.

Disclosure of Loan Assets in Government Accounting

According to the Ministry of Economy and Finance’s guideline titled Loan Accounting Treatment Guideline, the rules apply to loan projects in which national accounting entities provide loans at interest rates lower than the effective market rate.

In this guideline, “loan” refers to government lending to public institutions, monetary financial institutions, non-monetary financial institutions, other private institutions, local governments, or individuals—excluding re-lending loans extended through the Public Capital Management Fund’s foreign loan account.

A “loan subsidy cost allowance” refers to the difference between the principal of the loan and the net present value of expected recoverable cash inflows. This amount accounts for both:

• the implicit cost of offering loans below the market (effective) interest rate (i.e., discounted present value); and
• the risk that the principal and interest may not be fully recovered.

The guideline stipulates that the recoverable amount’s present value should be calculated by discounting expected net cash inflows from the loan using an effective interest rate. This rate should be equivalent to that of government bonds with similar maturities, or, if available, the actual funding cost of the specific loan project.

Loan Accounting Treatment Guideline

1. “Loan” refers to government loans excluding re-lending loans disbursed through the foreign loan account of the Public Capital Management Fund.
2. “Loan subsidy cost allowance” refers to the difference between the loan principal and the net present value of recoverable cash flows.

In essence, the loan subsidy cost allowance reflects both the fiscal burden of discounting below-market interest rates and the risk of unrecovered funds. The purpose is to reflect the accurate financial condition during fiscal settlements, provide clarity on recoverable assets, and help fund managers efficiently adjust loan programs.

Issue 1. Agricultural Land Management Fund

In the Agricultural Land Purchase and Reserve Program under the Agricultural Land Management Fund, loans are allocated and recorded as loan assets in the national financial statement. However, due to the claim that maturity dates cannot be fixed, no loan subsidy cost allowance has been established—leading to distortion in asset valuation.

According to the 2023 Fiscal Year Agricultural Land Management Fund Financial Settlement Report submitted to the National Assembly, the Fund supports:

• customized farmland programs,
• debt-relief farmland purchases,
• farmland pensions,
• overseas expansion of agri-food industries.

One subprogram—Public Lease Farmland Purchase—uses loan funds from the Agricultural Land Management Fund to lend to the Korea Rural Community Corporation (KRC) without specifying a maturity date. KRC purchases farmland from retirees or those exiting farming, and leases it at low rents to young farmers.

In this case, loan interest is effectively collected through rental income, and principal repayment only occurs in rare cases, such as when farmland is acquired for public projects.

Profit and Loss from Public Lease Farmland Purchase Program

Source: Ministry of Agriculture, Food and Rural Affairs

The average return rate, calculated as rental income over outstanding loan balance, was only 0.22% in 2023—indicating a strong case for establishing a loan subsidy cost allowance.

However, the Ministry of Agriculture, Food and Rural Affairs did not record such an allowance in the national financial settlement, citing the uncertainty of loan maturity. As a result, the full loan amount is listed as an asset, despite its limited recoverability.

Moreover, although KRC is a public institution, the loans were disbursed under the budget line for “Other Private Loans (450-04),” and no maturity date—a core condition of any loan—was defined. This reflects a deficiency in loan design and management.

Therefore, the Ministry should revise its approach to include maturity dates aligned with the actual structure of the loan project, establish a loan subsidy cost allowance, and prevent further distortions in national asset reporting caused by incomplete loan accounting practices.

Issue 2. Case of the Private School Promotion Fund – Happy Dormitory Support Program

Secondly, in the loan project under the Private School Promotion Fund (administered by the Ministry of Education), part of the loan funds for the Happy Dormitory Support Program is being executed as equity investment. This calls for proper budget classification. Furthermore, although the program operates at a lower-than-market interest rate, the Ministry and Fund have not established a loan subsidy cost allowance, which needs to be rectified.

The Happy Dormitory Support Program aims to provide dormitory infrastructure for university students to promote stable academic environments. In 2023, the entire budgeted loan amount of KRW 70.73 billion was executed.

1. Improper Use of Loans as Equity Contributions
   The program operates by establishing special purpose companies (SPCs), through which loans are disbursed. According to the Ministry of Education, a small equity contribution of KRW 5 million per SPC is included in the loan budget. Consequently, in 2022 and 2023, KRW 15 million and KRW 10 million respectively were used as equity investments.
   However, equity contributions and loans serve different budgetary purposes. Since the number of SPCs can be arbitrarily adjusted within the total loan budget, it restricts the National Assembly’s ability to deliberate the number of new equity-recipient SPCs. Therefore, the Ministry must discontinue the practice of executing equity contributions through loan budgets and instead allocate them under a separate budget item.

2. No Loan Subsidy Cost Allowance Despite Low-Interest Lending
   The Ministry of Education and the Private School Promotion Fund provide loans to SPCs at a low interest rate of 1.70%, yet have not established a loan subsidy cost allowance.

Source: Korea Foundation for the Promotion of Private Schools

The Ministry of Education explains that the loan is funded via the Housing and Urban Fund at a borrowing rate of 1.5%. According to the Loan Accounting Treatment Guideline, the effective interest rate for subsidy cost calculation should match the rate of government bonds with similar maturity, unless directly sourced funds exist—in which case the borrowing rate may be used.

Guideline Exception Clause:
“If directly sourced funds exist for a loan project, the effective interest rate may be the cost of those funds rather than the government bond rate.”

Based on this exception, since the borrowing cost (1.5%) is lower than the lending rate (1.7%), the Ministry claims that no subsidy cost allowance was required. Furthermore, the Ministry of Land, Infrastructure and Transport regards the 1.5% transfer to the Fund as a deposit, not a loan, and thus asserts that the Loan Accounting Treatment Guideline does not apply to it.

However, applying this exception to inter-fund deposits (such as between the Housing and Urban Fund and the Private School Promotion Fund) allows for artificially inflated asset values. In effect, this permits public entities to avoid recognizing subsidy costs that would have applied if the loan had been sourced within a single fund.

This undermines the fair valuation of national assets and distorts financial reporting. Therefore, it is necessary to consider revising the guideline to prevent such loopholes and ensure accurate accounting across government entities.